Stock of the Day
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E*Trade (ETFC)
E*Trade Tanks on Bankruptcy Fears
Shares of E*Trade plummeted by over 50% Monday, trading at their lowest price since April 2003, after Citigroup analysts raised the specter of bankruptcy and downgraded the financial services company. E*Trade, which specializes in online discount brokering, had announced Friday that the company would take heavier-than-expected write-downs on its mortgage-backed securities portfolio, and also that it is the target of an informal Securities and Exchange Commission probe into its loan and security portfolios. The bleak news led an E*Trade executive to release a message on its website reassuring customers and investors that E*Trade can absorb a writedown as large as $1 billion. But is that margin enough to keep E*Trade afloat during the mortgage meltdown?
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As is the case with other companies in the subprime mortgage-backed loans business, the bad news for E*Trade started long ago. However, the company had until recently appeared to be navigating the storm as well as its rivals, such as TD Ameritrade (AMTD: Charts, News, Offers) and Charles Schwab (SCHW: Charts, News, Offers). But Friday's announcements of as-yet undisclosed writedowns and an SEC investigation alerted investors that this was not in fact the case.
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To make matters worse, Citigroup analyst Prashant Bhatia downgraded E*Trade's rating from "Hold" to "Sell" and said that there is a 15% chance that the company will declare bankruptcy. This news sent E*Trade shares into freefall, losing nearly half of their value in early-morning trading and dipping below $4 per share before noon.
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Citigroup's actions caused E*Trade to fire off a letter to customers and investors in hopes of stemming the hemorrhaging. On the E*Trade website, President and Chief Operating Officer wrote, "We could absorb an immediate writedown in excess of $1 billion and still remain well capitalized," but also acknowledged that these are tough times for his company. Unfortunately for him, as damage control goes it's too little, too late.
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Without a doubt, E*Trade will have to revise its fourth-quarter outlook, but leading analysts are unsure what to expect and seem to be adopting a "wait and see" approach for now. No one is questioning that E*Trade has a rough few months ahead, though with the experts grasping at conjecture, exactly how rough remains to be seen.
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Profile |
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